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Viacom Has Some Viability

But the company needs to see growth in its Media Networks division.

This column was originally published on Street Insight on May 10, 2007, at 11:36 a.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers. For more information about subscribing to Street Insight, please click here.

Given ongoing weak ratings at

Viacom's

(VIA.B)

big cable networks, the biggest risk to the company's shares is that U.S. TV growth does not accelerate.

Management is doing everything it can to accelerate that growth, however. The company took more than $50 million in restructuring charges at the Media Networks division in the first quarter.

Still,

Viacom

(VIA.B)

might be making progress.

The company reported better-than-expected first-quarter results Thursday, and risk was to the downside. So the results should be greeted favorably by investors, and Viacom shares will most likely buck the sell-the-news reactions seen following good results from

Disney

(DIS) - Get Walt Disney Company Report

and

News Corp.

(NWS) - Get News Corporation Class B Report

.

The company reported adjusted earnings of 34 cents per share against a consensus estimate of 32 cents for the quarter ended March 31. Revenue of $2.75 billion also exceeded analysts' estimates of $2.55 billion, driven mostly by upside in the entertainment segment.

Revenue rose 16% vs. a year ago, but heavy spending at the company's cable networks and movie studio pushed operating income down 20%.

Media Networks, which includes all of Viacom's cable networks, such as MTV and Nickelodeon, reported 10% revenue growth and 6% operating income growth. Advertising grew by 10%, and other revenue was up 2% year over year.

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Affiliate fees also grew by 14%, boosted by foreign currency and acquisitions; organic growth was just 4% abroad and 10% in the U.S. The closely watched domestic advertising showed growth of 8%, slightly ahead of analysts' estimates.

Management would not break down the figure between digital and TV revenue but did note that digital revenue was running strong enough that the previous goal of $500 million in 2007 was now a "commitment." This probably means that U.S. TV growth was in the low-single digits.

Furthermore, the margin decline from 39.5% to 38% is the result of heavy spending on new programming and promotions.

For shares to work significantly from here, this investment must pay off with improved ratings and acceleration in domestic advertising growth at MTV and Nickelodeon.

In addition, Paramount, the company's film studio, had slightly wider-than-expected losses, because the studio spent more than $170 million ahead of its new releases in the first quarter, which was mismatched against revenue that will mostly be recorded in the second and third quarters.

Key films including

Blades of Glory

and

Disturbia

have performed well, and if the studio's big summer film

Transformers

does decent business after its July 4 release, the studio is set for a strong second half as revenue flows through and DVD sales arrive.

Second-quarter trends are solid so far, possibly enough to overcome last year's weak upfront sales and lift total advertising growth to the midsingle digits. But the company has a particularly tough comparison in the second quarter, so some slowing in growth from the first-quarter rate is expected.

Viacom's stock-buyback is still in place, but the pace slowed in the first quarter. Management said that the company still intends to buy back the full number of shares authorized and seemed unconcerned.

Second-half ratings and advertising growth will be key determinants as to how bright the future is for Viacom. I remain on the sidelines, partially due to my preference for Disney, News Corp. and

Comcast

(CMCSA) - Get Comcast Corporation Class A Report

, but my negative bias might be tested.

At time of publication, Birenberg was long DIS, and long NWS, CMCSA and CMCSK in selected accounts, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Prior to forming Northlake, Birenberg was a principal, director of research and portfolio manager at Gofen and Glossberg, LLC. Prior to that, he was a trust investment officer at Star Bank in Cincinnati, Ohio. Birenberg has managed portfolios and researched stocks for more than 22 years. He earned his bachelor's degree from Miami University, Ohio. From 1987 through 1992, Steve taught at the CFA preparatory program the Study Seminar for Financial Analysts in Windsor, Ontario. Birenberg appreciates your feedback and invites you to send it to

steve.birenberg@thestreet.com.